Gold Prices Fall as Safe Haven Appeal Weighed Down by Improving Euro Zone Economy

Gold prices fell on Friday as safe haven bets received a strong blow after the news emerged that European Central Bank (ECB) will be soon get back euro 137 billion, ($182.2 billion) that was borrowed by hundreds of European banks about a year ago, a move which clearly points that financial markets in the region are regaining stability while metal’s repeated failure to breach the strong resistance of $1,695 for nearly a week, also triggered a technical sell-off.

Spot gold however settled higher as weakness in prices boosted the demand for physical metal from Asia.

Now all eyes will remain focused on the Federal Reserve’s next FOMC, slated to start next Wednesday.  Investors will seek whether the central bank is still in mood to keep monetary policy loose in the wake of some solid economic indicators.

Gold futures for February delivery fell $13.30 an ounce or 0.8% to settle at $1,656 while spot gold edged up 0.63% to close at $1,668.74 an ounce.

The SPDR Gold Trust (ETF) (NYSE: GLD) ended the day 0.48% lower at $160.65.

The euro zone debt and banking crisis, which engulfed the 17 nation monetary union’ s economy for last three years, supported gold’s safe haven appeal. However, lately there have been many instances that showed the euro zone economy has seen its worst.

On Friday, the Ifo Index, which is a gauge on business sentiment in Germany, rose unexpectedly higher than analysts’ expectation for the month of January. Earlier in January, the ECB President Mario Draghi also showed optimism as he said that euro zone economy could see turnaround from the second half of the year while few days ago the European Commission said that consumer sentiment in the region was improving.

Improving business sentiment in Germany boosted the euro as it climbed to its 11 month high against the U.S. dollar; nevertheless, the rally in euro failed to support bullion. In general, weakness in the U.S. dollar tends to support demand for dollar-dominated commodities as they become less expensive for those traders who deal in currencies other than the greenback.

A strong rally in the equity markets, triggered by stronger than expected quarterly results from most Wall Street’s heavy weights thus far along with string of solid economic data from across the world is also weighing on bullion as investors are preferring to take bets on riskier and better performing assets.

“Europe is suddenly in vogue, and those who bought gold as a hedge against it are getting out and into equities instead,” said Saxo Bank vice president Ole Hansen in a note to investors.

“Euro gold is also hurting some here,” he added.

Bullion’s safe haven appeal was also knocked down by U.S. congressional leaders’ decision to extend the debt ceiling limit until May 18 thus removing any short term threat of sovereign default.

Will The Federal Reserve Keep its Monetary Policy Accommodating?

Minutes from the Federal Reserve’s last FOMC (Dec. 11-12) showed that several top officials were worried over central bank’s unprecedented asset and bond purchase program. In the backdrop of improving economic environment, speculation is rife that Fed could end its ongoing quantitative easing sooner than expected. However, the opinion is divided over the immediate roll back of monetary easing measures.

In a note to investors, Joni Teves, an analyst at UBS Bank wrote, “Accommodative policy is still expected to remain in place for some time, a scenario that continues to be conducive for higher gold prices. And in that sense, the recent pullback should be viewed as an opportunity to pick up metal at more attractive levels.”

In some other precious metal markets, silver futures for March delivery plunged 52 cents or 1.6% to close at $31.21 an ounce. Platinum for April contract gained $11.10 or 0.7% to settle at $1,694.90 while palladium futures for March delivery jumped $14.30 an ounce or 2% to end the day at $741.

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Post Written By: Ed Liston Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications. He is widely quoted in various financial publications on the Internet. When Ed is not writing about stocks, investing in stocks, talking about stocks, or otherwise doing something stock related, he likes to go sailing and fishing in his yacht.